Take Two: Surprise slowing of US inflation lifts stocks, and calls for greenwashing rules at COP27

What do you need to know?

Markets reacted positively to US inflation data for October which showed a slower-than-expected increase. The Consumer Price Index was up 7.7% year-on-year, the lowest level since January, and excluding volatile fuel and energy unexpectedly slowed to 6.3% from 6.6%, prompting hopes that a peak had passed and that the Federal Reserve would have the scope to soften the pace and scale of rate hikes by more. An easing of COVID-19 restrictions in China also helped boost stocks; the MSCI World Index was up 6.9% in the week to Thursday’s close.¹ Meanwhile the outcome of the US midterm elections remained uncertain last week, but failed to deliver an expected surge in support for the Republican Party. Overall control of the Senate could rest on a December run-off in Georgia.

Around the world

A crackdown on greenwashing was one of the pledges at the United Nations climate change conference COP27 last week. The High-Level Expert Group set up by UN Secretary-General António Guterres demanded greater scrutiny over net zero commitments, and drastic cuts in greenhouse gas emissions before 2030, rather than 2050. A separate report suggested approximately $2trn will be needed annually by 2030 to help emerging markets, other than China, to transition to net zero and contend with the devastating effects of climate change – where both domestic and external finance will be key. COP27 continues throughout this week and ends on Friday.

Figure in focus: 2.1%

China’s annual inflation fell to 2.1% in October from 2.8% the previous month, its lowest since May and below market expectations. The country has seen poor overseas and domestic demand, hampered by strict COVID-19 restrictions, alongside global cost pressures. The figure accompanied a drop in China’s Producer Price Index, a measure of factory gate prices, which fell by 1.3% compared to a year earlier - its first decline since December 2020. Meanwhile, trade data was also weaker with both imports and exports falling in October.

Words of wisdom

Marginal propensity to consume: The proportion of additional income – from wage growth, tax cuts or whatever - that is spent, rather than saved. This determines how changes in fiscal stimulus feed through to boosting the economy, but is complex as households often react differently to different types of income. Data reported last week showed Eurozone retail sales grew for the first time in four months in September, rising 0.4% from August, driven by growth in mail order and internet shopping.

What’s coming up

Monday sees India report its inflation numbers for October, while on Tuesday a second estimate for the Eurozone’s third quarter (Q3) GDP rate is published. On the same day Japan gives a preliminary estimate for its own Q3 economic growth. Canada and the UK update markets with new inflation numbers on Wednesday and on Thursday UK Chancellor Jeremy Hunt delivers his Autumn Statement. Friday sees Japan’s latest inflation numbers reported.